Question of the Month #3–Best Measure of Law Firm Performance: Report & Commentary

Question of the Month #3 was, “What is the best measure of law firm performance?” This column is by Janet Stanton, Partner, Adam Smith, Esq.

This question is gaining currency in our industry, with it being asked with greater frequency and not a few upcoming events are devoted to exploring the issue. As with many aspects of Law Land, I don’t get why this is so hard; Corporate Land figured this out eons ago. Revenue, profits, margins, CAGR (compound annual growth rate), same-store sales, ROI, revenue passenger miles, market share, hotel occupancy. Depending on what industry we’re talking about, the best, most relevant measures of performance are clearly established. So, why not Law Land?

But, I’m getting ahead of myself. Let’s start with the results from our latest Question of the Month. Quick reminder: the question was: What is the best single measure of law firm performance? Here are the choices we gave you, dear readers:

Absolute level of PPP

5-year growth rate of PPP

Absolute level of RPL

5-year growth rate of RPL

Client satisfaction and retention

Lawyer satisfaction and retention

We also gave you the opportunity to volunteer “something else entirely,” as well as the option of describing what that might be.

And, the envelope, please.

Very happy to report that 153 of you weighed in, a hefty increase of 56% over last month’s response rate. (Thank you.) Here’s the breakdown of the voting:

Client satisfaction and retention: 39% (59 votes)

5-year growth rate of RPL: 23% (35 votes)

Absolute level of RPL: 14% (22 votes)

Absolute level of PPP: 8% (12 votes)

Lawyer satisfaction and retention: 6% (9 votes)

5-year growth rate of PPP: 5% (8 votes)

Eight of you (5%) thought it was “something else entirely” – and a few of you provided your opinions. (Thanks for the many thoughtful comments!)

As has been the case with our previous QOMs (Questions of the Month), the results are pretty surprising – in an entirely welcome way. I never would have guessed that “Client satisfaction and retention” would win and by a such a substantial margin. Nearly 40% of votes were cast for this option. How is it that you, dear readers, are light years ahead of the far majority of our industry in recognizing the foundational criticality of client satisfaction (cannot state that strongly enough).

How far ahead are you? A bit of context. A couple of years ago, Citi noted that only half (49%) of law firms reported having any kind client feedback program. Compared to other industries, where feedback is ubiquitous, that number is pretty shocking. And, certainly client feedback is an essential component to determining client satisfaction (abetted by other metrics, such as practice penetration, realization, etc.) So, if a large swath of firms aren’t even getting (any kind of) client feedback – they sure as shootin’ aren’t meaningfully tracking client satisfaction. Give yourselves an “A.”

Also surprising (in a good way, IMHO) is the short shrift given to PPP as a measure of law firm performance. In total, PPP received only 13% of votes cast. “Absolute level of PPP” garnered 8% of votes and “5-year growth rate of PPP” got a measly 5%. Take that, PPP disciples!

More good news (from our perspective), was the relatively high level of support for RPL as a measure of law firm performance. Well over 1/3 of you (37%) voted in some fashion for RPL. “5-year growth rate of RPL” generated 23% of votes and “Absolute level of RPL” 14%. We like RPL as an indicator of law firm health for a couple of reasons. First, this metric is difficult to “game” (unlike PPP); revenue and total lawyers are hard numbers. Also, it seems to be a proxy for how clients value a firm’s lawyers. Of the two RPL options, “5-year growth rate of RPL” provides an excellent way to compare different-sized firms and those with varying strategic priorities; CAGR irons out these variables.

As noted, we received several thoughtful (and long!) comments. I was surprised that no one mentioned firm profitability as a measure of performance. It has served Corporate Land very well for quite some time (notable exception: Amazon). For sure, one would need to take into account as an expense what a firm would need to pay non-partners for the equivalent work partners do.

Back to client satisfaction and retention. Happy to report, Bruce and I disagreed on this as the “best measure;” Bruce thought it was and I didn’t. (Full disclosure, of the available options, I voted for 5-year CAGR in RPL. But, at heart, I’m a “profit girl.”) First off, client satisfaction is devilishly difficult to measure in any consistent way. And, while there is a significant body of research that causally links client satisfaction with profitability, there are additional management, environmental (etc.) factors that can have a significant impact on law firm performance. What I suggest is that “client satisfaction” is a primary leading indicator of performance that law firms ignore at their peril.

That said, let’s keep it “real” and not over think this. Law firms, when you come right down to it, aren’t all that complicated.

And, dear readers, please (please) let us know if there is a question you’d like us to pose.

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